The long-awaited hope of economic reopening and global growth materialized in the second quarter as an increasingly vaccinated population encouraged a return to economic activity. The rapid increase in activity created fast economic growth and falling unemployment off the pandemic highs, but this was tempered by relatively higher inflation pressures, transitory or not, supply constraints, labor shortages and a backup in rates. This initially continued to produce a positive environment for lower valuation and cyclically exposed stocks, but this turned towards the end of the quarter as growth stocks began to rally after experiencing multiple compression over the past three quarters.
The relative strength of growth stocks late in the quarter seemingly reflects the nature of an accelerated economic cycle. While international growth indices pushed closer to all-time highs, the positive performance was not ubiquitous. Chinese companies, and specifically Chinese technology, continued to struggle as regulatory uncertainty dampened investor sentiment. Europe showed some relative strength during the quarter as Japanese growth stocks struggled.
Second-Quarter Performance Highlights
- The Thornburg International Growth ADR Strategy—Wrap returned positive 4.47% (net of fees), underperforming its benchmark, the MSCI All Country World ex-US Growth Index, which returned positive 6.60%.
- Top contributors to performance by sector were in health care and consumer staples, where stock selection in the sectors drove relative outperformance. The primary detractors by sector were in the two largest sectors, information technology and consumer discretionary.
- Top contributors to performance by geography were the Netherlands and Canada where stock selection was the primary driver in both countries. The countries that were the largest detractors from relative performance were France and China as stock selection effects were negative.
Current Positioning and Outlook
For the rest of the year, economic growth should continue as the world re-opens and economic activity rebounds off a low base. Although this broadening of economic growth has favored the relative laggards of last year, such as rate sensitive, commodity focused and cyclical stocks at the expense of growth stocks and “pandemic beneficiaries,” we believe that much of the cyclical multiple reflation is priced in the market. As we look further out, aspects of the market environment remain uncertain and volatile and there is likely to be a wide range of outcomes amongst economies and company fundamentals. We believe this creates a favorable environment for our process that emphasizes bottom-up analysis and stock selection. We see the fundamentals of our companies as strong and in many cases strengthening. In spite of macroeconomic factors, such as rising inflation expectations, that can impact valuations, we believe that as economies normalize and we enter mid to later cycle conditions, this creates a favorable backdrop for high quality growth stocks.
Thank for your continued support and for investing alongside us.